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Financial Industry Insights from Advisors Asset Management
On April 19, 2023
Europe Still Leading
International markets performed well during the first quarter 2023 with the MSCI ACWI ex-U.S. Index nearly matching the S&P 500 Index’s 7.5% surge. Europe led, returning +8.8% for the quarter and +4.5% over the trailing 12 months (TTM). Quality, growth, and expensive stocks did well during the quarter, while over the past 12 months, leading factors had more of a value flavor. During the quarter, leadership was broader for international stocks as the top 10 performers only amounted 25% of the MSCI ACWI ex-U.S. gain compared to 90% for the top ten in the S&P 500. Market breadth is often an underlying sign of health that we feel bodes well for international investing. Furthermore, we believe this quarter’s counter-trend rally is likely nearly spent, and that the value and old-economy stocks that led last year are likely to reassert themselves. Europe and China are likely to see expansions, which could help rates to remain higher than expected and allow the leaders of last year to re-emerge.
Major Points to Note
Looking Ahead
Investor sentiment has been volatile and moved quickly between extremes. Still, markets have been resilient and acted better than many of the bearish analysts had predicted. This reinforces for us the thought that we are probably in a trading range until the tug-of-war between recession fears and soft-landing hopes are resolved. We believe investors should not get too bullish near the top of the trading range nor too bearish at the bottom of the range. Remember, at the bottom end of the range, a moderate recession is already priced in.
We believe a capital cycle is unfolding, as years of underinvestment in old-economy-type companies needs to be addressed. There is little spare capacity in energy and other raw materials. China is re-opening and, assuming the rest of the world avoids recession for now, prices could be poised to work higher. Investment is needed for infrastructure spending, re-shoring manufacturing investments, new green energy initiatives, commodities production, and last (but not least) defense spending. This investment spending needs to be financed, so banks could benefit from that, especially if upward pressure on rates allows for higher net interest margins. Investors worry that deposit rates are likely to increase, so we will be watching the upcoming earnings reports for guidance on that front.
As we look forward, we see few excesses in consumer or corporate balance sheets. While there may be some areas of over-investment in select speculative technology and real estate (offices and retail), deep recessions usually are driven by a wide swath of consumers and companies over-levered to housing or capital or real estate, and we are not seeing that now. We believe the recent reprieve that growth stocks have seen is a rally within a secular bear market. Earnings season should provide additional insight into fundamental trends within the market. Europe is expected to have generally better earnings than the U.S. and Asia, something that could increase investor interest in those markets.
Many strategists are very bearish on economic prospects globally. We believe economic growth in international markets is probably poised to improve as China reopens their economy. Until the U.S. and European recession questions are resolved, we expect markets to probably track sideways in a range. Higher rates have led to higher recession risk (and bank risk), but if we resolve the recession/soft landing debate and get into a recovery next year, we think the outlook for equities could be good after that. Until then, a trading range with rotation towards value is our base case, and we believe international stocks should do well in that environment.
CRN: 2023-0414-10804 R
The opinions and views of this commentary are that of Todd Asset Management and are not necessarily that of Advisors Asset Management.
This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the Disclosures webpage for additional risk information at commentary-disclosures. For additional commentary or financial resources, please visit www.aamlive.com.
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